Why does IndusInd Bank's evergreening activity hurt investors?
On November 5, 2021, ET reported that whistleblowers (including a group of senior employees) alleged Bharath Financial Inclusion (BFIL) and its parent IndusInd Bank about an evergreening activity taking place extensively since the Covid outbreak. The issue was raised to RBI as a caution to prevent the subsidiary from devouring into its parent's financials.
The accusation says IndusInd's microfinance subsidiary carried out a vast evergreening activity involving 80,000 accounts in May 2021. It has transferred funds to customer accounts without any customer consent. IndusInd Bank responded to the issue, denying the accusation of evergreening but accepting that it had transferred funds to 84,000 accounts without customer consent.
The bank owes the flaw to a technical glitch in the systems.
What is Evergreening?
Evergreening is an activity where banks offer loans to borrowers to help them pay their existing loans on the verge of default of the current loans. Under non-evergreening conditions, the defaulted loans would add on to the Non-Performing Assets (NPA). Evergreening manipulates the NPA by reducing the number of credit defaults in the short run and increases the bank's assets by issuing more loans. It is viewed as a substantial reputational loss to a bank and is followed by a severe explosion of defaults.
Some previous allegations of evergreening include that of ICICI in July 2018 and against Yes Bank in 2019 and 2018. None of the allegations were accepted by the banks. Hermindra Hazari quotes, "I have never seen any bank admitting to evergreening of loans."
The explanation by IndusInd bank does not say that the event has not occurred but claims it to be due to a technical glitch. IndusInd explained that: BFIL has undergone a technological upgrade in April 2021. The loan disbursal was made entirely free of manual interruption, making it automated from end to end. The upgrade includes a biometric stage for customer approval and an OTP approval for those who fail the biometric. On account of a bug in the system on May 21, 2021, the OTP stage was bypassed for the customers who failed the biometric, and the loans were disbursed. This puts forward an undue operational risk in the bank's functioning as the crucial step, "customer consent," is skipped due to a technical glitch.
Moreover, the explanation fails to pinpoint a particular person or group of people responsible for the flaw. The bank also clarified that the issue was identified within two days and carried out the rectification process. By September 30, 2021, there were only INR 340 million outstanding loans, accounting for 0.12 % of the portfolio. The lack of accountability is again a disturbing factor. ET also reported the resignation of MR Rao, the non-executive chairman of IndusInd Bank, and the ex-CEO on September 15, which adds to the suspicion.
With so many flaws in place, the investors denied IndusInd Bank's explanation. As a result,
• The share price faced an intraday fall of 10% on November 8 (Fig 1). The market capitalization fell by INR 94 billion. IndusInd Bank accounts for 5.3% of the Bank Nifty Index. 10% fall in IndusInd thus translates into a 0.5% fall in Bank Nifty roughly (around 198.37 points concerning the opening price of BN on November 8). Nifty opening at a gap up of 123.4 points on November 8 with no substantial reasoning put selling pressure on the FIIs.
• This, along with the bad news of IndusInd Bank, led to almost 100 to 150 points fall in Nifty during the beginning hours of the day (Fig 2).
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